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Rethinking fossil fuel subsidies

The government has proposed direct cash transfers instead of subsidies on essential items including kerosene and diesel to the poor. The country certainly cannot permit the huge losses from subsidies any more, says Darryl D’Monte, but it remains to be seen whether cash transfers or a coupon system, or even a combination of such reforms, will work

At the best of times, the authorities tend to obfuscate when it comes to subsidies of any kind. However, it came as a severe shock when the prime minister recently tried to equate the “subsidy” in allocating scarce second-generation or 2G spectrum with those on food or fossil fuels! Surprising, considering that he is an economist of some repute, and a leader known for his honesty. The comparison is both factually incorrect and enormously misleading.

At a recent one-day workshop in Mumbai on fossil fuel subsidies, organised by the Geneva-based Global Subsidies Initiative, which is sponsored by the International Institute of Sustainable Development in Canada, much of the mystery surrounding subsidies was sought to be removed.

A researcher who has devoted a large part of his professional life as an academic at the University of Texas in Austin, and later as an activist back in Mysore is Dr Bhamy V Shenoy who made a presentation at the workshop.

It was inevitable that the ghost of Yashwant Sonawane, additional district collector of Malegaon in Maharashtra, who was burnt alive for confronting the kerosene mafia, hovered over the deliberations.  

Kerosene subsidies have a long history. They started during the Second World War when there was an obvious shortage of petroleum products and the poor depended on kerosene for lighting and cooking. That’s why it was included in the public distribution system (PDS). Although controls were removed after the war, they were re-introduced in 1957 when the PDS was expanded to include kerosene.

Liquefied petroleum gas, or LPG, was subsidised in the late-’60s because women cooking on energy-inefficient stoves are exposed to enormous hazards. However, even today, only 9% of rural households use LPG, as much due to its non-availability as to its high (and rising) price. Almost 80% of the rural population uses kerosene, which explains why racketeers seek to divert supplies and sell it on the market or substitute it for diesel in various applications. To complicate matters, kerosene is available at a cheaper price in Bangladesh and is smuggled across the border.

A 2005 study by the National Council for Applied Economic Research showed that as much as 38% of PDS kerosene was being diverted to the black market; in some states it exceeds half the supply. This black money must surely be a major source of funds for election expenses in rural areas, leading to a severe distortion in the political system. Besides, when kerosene is blended with diesel, or even petrol, it damages the vehicle’s engine and generates air pollution due to inefficient combustion.

We must not forget the murder of S Manjunath, a young sales officer with the Indian Oil Corporation, who was shot in cold blood by the oil mafia when he tried to expose fuel adulteration in Uttar Pradesh, in 2005. The stakes in this racket are obviously so high that criminals will stop at nothing to get their way.

In the 1980s, the government made an attempt to tackle the diversion by blending PDS kerosene with a blue colorant. However, officials colluded with petrol station owners and few cases were reported. Moreover, a dye to neutralise the blue colorant was soon developed, rendering the additive ineffective.

In 2006, Petroleum Minister Murli Deora ordered the import of a non-removable dye from the UK. It cost the country just $33 million per year -- a small price to end the malpractice. However, petrol pump owners countered the move by neutralising the marker with common clay. In two years, the idea was dropped. Following the murder of Sonawane, the concept of using a dye is being resuscitated.

Dr Shenoy launched an interesting experiment in 1989 in Mysore by helping the district administration introduce a coupon system. As he puts it: “At the beginning of the month, each beneficiary was given coupons to buy an allocated quantity of kerosene. The dealer must sell kerosene only to those with coupons. The next month, the dealer will be supplied kerosene based on the coupons he has collected from the beneficiaries. If he has sold kerosene in the black market, or diverted it for other uses, his next month’s supply will be reduced accordingly since he will not have the coupons for such sales. Thus, a dealer can divert the sale only once, after which his quota will be reduced accordingly.”

The Mysore Consumer Council conducted a survey soon after the system was introduced. Not surprisingly, consumers were happy because they didn’t have to wait in long queues any longer and could go whenever they wanted to collect their supply. (Research conducted in the country as a whole reveals the tremendous cost, mainly to women and children, of waiting for kerosene supplies; on occasion, people queue for several hours only to discover that the tanker isn’t arriving.) Dealers, however, were unhappy with the measure as they, for a change, had to wait for consumers to arrive and cash their coupons before they could replenish their supplies for the following month.

Although the idea was accepted by bureaucrats and some far-sighted political leaders, and successfully implemented in other parts of Karnataka, the lobby against it proved too strong and it was slowly dismantled. The recent budget makes a case for cash transfers for consumers of kerosene from 2012, possibly using the unique identification number system if it is in place. However, as Jean Dreze and others have commented, India may not be entirely ready for such a system. Males will get the cash and blow it up on non-essentials. Not to mention the high degree of exclusion due to caste, community and class factors in any devolvement of power to the grassroots. The kerosene coupon certainly deserves a second look.

The other fuel on which subsidies prove extremely perverse is diesel. Although Environment Minister Jairam Ramesh himself said that anyone driving an SUV (many of which run on diesel) was “criminal,” precious little has been done to curb the use of this fuel by motorists. Diesel causes serious air pollution. It is calculated that one person dies every hour in Delhi due to this contaminant alone.

Half of all cities in the country have critical levels of particulate matter (PM10). Levels of nitrogen oxide are also way over the limit. After the Commonwealth Games, the authorities can measure levels every hour, indeed every minute if necessary. Tiny diesel particulates lodge in the chest and cause respiratory problems. They may also prove carcinogenic; the US Cancer Society estimates that in that country, 600,000 people have died due to automobile pollution in the past 10 years.

In Delhi, surveys have shown that 55% of the population lives within 500 metres of an arterial road. And, as is well known, Delhi has more cars than the three other major metros put together. When the Bus Rapid Transport System was introduced a few years ago, whereby bus lanes were reserved in the centre of an arterial road, all hell broke loose with the automobile lobby -- aided and abetted by a vicious media -- launching a frontal assault on the system. This inexpensive but highly efficient system has now been introduced in around 10 Indian cities -- most successfully in Ahmedabad -- and nearly a hundred elsewhere in the world. It is still being opposed in most cities in India.

India is being projected as “the auto hub of the region” despite the prevailing wisdom that public transport ought to be subsidised at the cost of private modes of transportation. The country still drags its feet in imposing Euro emissions standards for various pollutants, which is why environmentalists have persistently asked the authorities to “leapfrog” and introduce the most stringent standards.

In 2000, diesel cars formed only 2% of the total number of cars. Last year it went up to 36%, and the figure could soon rise to half. Cars account for 15% of the diesel used, second only to trucks. Buses and agriculture use 12% each. Industry uses a tenth, while the railways use 6%, and power generation 8%.

While diesel has been heavily subsidised to prevent dealers from substituting kerosene mainly as a fuel for two- and three-wheelers, the irony is that it’s private motorists who are benefiting from this anomaly. Smaller and smaller cars are switching to diesel; the Nano will too, in time. SUVs and bigger car makes witnessed a 10% increase in sales last year. In the smaller category (cars with an engine capacity under 1200 cc), 85% use petrol. In the larger category (on which excise is higher), with a capacity of over 1500 cc, 64% use diesel. This amounts to use of the subsidised and polluting fuel to the extent of 6.5 million tonnes of oil equivalent, between 2010 and 2020.

Diesel also contributes to the climate phenomenon known as “black carbon” and the controversial Atmospheric (earlier, Asian) Black Cloud. Particles of black soot from vehicles in north India settle on the Himalayas, increasing the warming effect and leading, eventually, to a melting of the glaciers.

In Europe it is estimated that the pollution cost of diesel as vehicle fuel is twice that of petrol. India needs to make every effort to avoid the mistakes that Europe made. The UK has equalised taxes on petrol and diesel. In Denmark, cars using diesel are taxed more; Beijing doesn’t permit diesel cars.

The most inequitable feature of perverse subsidies in relation to diesel is the fact that, in this country, buses pay more taxes because the basis is the number of people carried rather than fuel used and pollution caused. As much as 70% of urban traffic infrastructure is meant for motorised transport. It is such anomalies that are responsible for the distortion in Delhi, for example, where a person using a two-wheeler pays Re 1 per km travelled, while the fare on a bus is Rs 5 for the same minimum fare. The capital’s buses once carried 60% of its passengers; that percentage has dropped to 40%.

Is it any wonder then that Mumbai’s BEST which was, or is, the country’s best bus service is witnessing a fall in passengers?

The Jawaharlal Nehru Urban Renewal Mission (JNURM) rightly stresses that cities should invest in public transport. In Delhi there is an air ambience fee on diesel, which goes into a fund. And there is a Clean Action Plan, which seeks to fund a switchover to electric cars and those run on compressed natural gas (CNG). It is important to remember that three-quarters of people in urban India earn less than Rs 85 a day, so public transport is the only alternative.

The one-time tax that owners of private vehicles pay is based on the capacity of the engine, and, over the life of a vehicle is ridiculously small. Cars should be taxed on their usage, the number of miles travelled.

In Dhaka, CNG is priced at 16 taka a litre while petrol is 90 taka. Bangladesh has no car industry so it imports second-hand cars and runs them on CNG. It has, according to the CSE, “the worst congestion, without any clear peak period. There are even Hummers and SUV rejects from Japan. After the oil price hikes in 2008, there was a mad rush in Delhi to import second-hand cars running on CNG”.

The distortions in these two fossil fuels -- kerosene and diesel -- should be the first to be set right. It remains to be seen whether cash transfers or a coupon system, or even a combination of such reforms, will work. The fact remains that the country cannot permit such huge losses to the exchequer any more. Or the deprivation of essential fuel for millions. Or indeed widespread air pollution.

Infochange News & Features, March 2011